Not Nearly Enough Panic

Are you more afraid of missing an oversold market rally, or is your bigger fear staying long for more of the current decline? I am not sure there is a real consensus yet on this dilemma -- and I believe folks' mixed emotions are due to the fact that the S&P 500 and Dow have hardly seen any selling at this point.

I will repeat again what I wrote on Friday: The new mantra of "group rotation instead of a correction" will likely disappear before this pullback is over. Why? Because decent trading lows do not arrive when there are still hidey holes in the market -- and, right now, there are seemingly plenty of places to hide.

Let's just do a back-of-the-envelope comparison between Friday and a big down day in early February. On Feb. 3, the NYSE and Nasdaq respectively saw 94% and 90% of the volume on the downside. Yet during Friday's decline, even as the Nasdaq lost more than 100 points, the index did not touch that level of downside volume. The NYSE, meanwhile, barely saw any selling at all.

Also on Feb. 3, the Arms Index (TRIN) reached 2.9 on the NYSE and 1.58 on the Nasdaq. On Friday, the Nasdaq reached just 1.3 while the Nasdaq closed at 1.49, never reaching the 1.58 level intraday. Furthermore, there was certainly no jumpy CBOE Volatility Index (VIX) on Friday.

My point is there was a heck of a lot more panic on Feb. 3 than there had been at the end of last week. In fact, the only sign of panic I witnessed came in the form of high volume on ProShares Ultra QQQ (QID).

Also, over the last three years -- and that includes the summer of 2011 -- volume never came close to what we saw on Friday. I went back to 2008 and did not see volume ticking over 10 million shares. Even the infamous 2010 "Flash Crash" did not see volume come significantly close to that of Friday.

Another sign of fear -- and I call it "fear," not "panic," because the VIX did not get jumpy  is that the put-call ratio of the VIX fell under 20%. This means a great deal of folks are betting on a higher VIX, or a market decline. You might recall that, in the past, this has been a reliable contrarian indicator for a forthcoming rally.

I looked back at the last five instances when a sub-20% put-call on the VIX coincided with a jumpy VIX. All of those instances resulted in nice tradable oversold rallies, even if they just lasted a few days.

In the five most recent cases when the VIX put-call merely dropped under 20% and did not get jumpy -- such as now -- the resulting rallies were not nearly as inspiring for traders. Three of those times, the S&P rallied less than 10 points, and it once proceeded to collapse by more than 2% before recovering all of those losses the following day. In the final instance, the S&P followed the reading with an eight-session rally, but that rally brought the S&P just 2% higher. While that's not bad, there was no big up day in all of it -- it was merely a grind upward.

The Nasdaq -- though not the NYSE -- is reading as oversold enough to rally. But, again, the setup isn't there for anything but a knee-jerk oversold rally. In the meantime, the NYSE remains overbought. So, to me, the market remains in a correction.

That said, wouldn't it be typical of the current market to keep everyone off-balance and produce a rally the oversold momentum stocks -- while it sends down the names that everyone thinks are OK?

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